In New Zealand, with a relatively small number of banks, we have an outstanding electronic payment system known as EFTPOS or Electronic Funds Transfer at Point of Sale. The great thing about EFTPOS is it is bank to bank. So no fees for the consumer or transaction fees for retailer or merchant.

As in many countries, ‘Contactless’ payments have arrived in New Zealand. We have Paypass from MasterCard and Paywave from Visa. What I didn’t understand was these are credit and debit card schemes, not a direct bank to bank scheme like EFTPOS. Bankers use the term ‘Scheme‘ to collectively describe the card providers like Visa and Mastercard.

Bank versus Scheme

Recently I received a new Visa card from my bank with Paywave on it. It was a combined card which accesses Credit, Cheque and Savings accounts. I had assumed I’d be able to configure my Paywave feature to access my Cheque, Savings or Credit Card but there was no configuration option. I only got to use Paywave the first time when I was in taxi in Sydney (tapping was so much easier than doing the print, sign, print receipt routine on my AMEX) and I realised then that Paywave is a credit card product. It does not provide direct access to my cheque and savings accounts.

That means, in New Zealand, Merchants pay the card fee – say 2.5%. If Merchants take a tap rather then their customers entering a PIN, the credit card Merchant fee is deducted. This is a very real cost to businesses, especially retailers. This is a big deal. You’ve probably noticed many Merchants are now adding Credit Card Surcharges. As an example paying for flights with a credit card costs me another $8. Recently paying for a hotel I was asked to pay a surcharge on top of the bill.

As we’ve seen with Online Invoicing in Xero, paying by credit card scales up only to certain size of transaction. Above say $1000 people would rather just pay directly with their bank and not occur a transaction fee. The Accounts Payable module in Xero manages that process and we’re doing a lot of works with banks in that area.

For small payments at retail, Merchants love EFTPOS. They pay a fixed monthly fee and don’t have to clip each transaction with the Credit Card fee.

Credit Cards have a place, especially as the issuing bank commits to pay the moment the transaction is authorized and give consumers more money to spend. However to provide this service the Merchant pays 1% to 4%.

We think it’s vitally important that Credit Cards aren’t the only way to pay at Point of Sale. If you have the money in your account both the Customer and Merchant benefit if EFTPOS is presented as a choice and that should also have the convenience of being Contactless.

You can imagine the costs of providing terminals at each Merchant, the payments network and security mechanisms. The Credit Card schemes understand the longer term benefit of garnering the transaction fees so are often underwriting the costs of these new technologies. The schemes are very clever and in some markets they have become the dominant way to pay. In order for EFTPOS to be available not only do the banks need to invest but they need to work together. Something banks often may struggle with.

EFTPOS has a different risk framework. I assume the reason we enter a PIN for EFTPOS is to ensure the card holder is legitimate. As funds transfer immediately with no transaction buffer for fraud insurance I think the banks would struggle to do contactless EFTPOS on its own. Of course that is where mobile phones come in and why the mobile becomes the cataylst for setting the model for the next generation of payments.

Big numbers

From what we can see total billings on credit cards for New Zealand issued cards domestically was $29 billion over the last year. So, assuming merchant rates of 2-3%, $580 – 870 million dollars would be taken out of the small business economy and paid to schemes annually. If the schemes displace EFTPOS – that’ll go up to between $1.3 – $2.0 billion dollars.

If a meaningful percentage of transactions move from EFTPOS to scheme the Merchants will have to recover that fee. That morning coffee, paid for by cash or EFTPOS now, will go up. Across an economy that is inflationary.

Schemes do provide value. They allow people to spend now and therefore stimulate retail. Schemes do need to be compensated for risk. But the back of the envelope calculations show there is a lot of money at stake.

Mobile EFTPOS

The mobile phone will be a key enabler for next generation payments. With mobile payments the contactless features are hosted on a phone. Importantly, the user is identified/authenticated on the phone before the payment is made – providing the speed and convenience of a contactless payment while still secure. Quite interesting as essentially the entering of the PIN (or mobile equivalent) is done off the critical path of the transaction. I.e. in the queue while you’re waiting to pay. Quite a nice process improvement.

The banks are of course terrified about Apple, Samsung and local Telcos as they play in mobile payments. These new players naturally see gaining a slice of the Payments pie as the prize. Merchants should be watching closely as the deal that shapes up will have a big impact on their costs.

Merchants should be sending a clear message to their banks that they should be working together to ensure the phone is a convenient security token for payments and not necessitate payments touched by mobile be subject to transaction fees.

Getting mobile payments right is foundation infrastructure and reduces payments friction in an economy. It’s too important to get wrong.

Banks, Handset providers, Telco’s and the Credit Card Scheme’s are hammering these issues out right now.

Banking on change

Payments New Zealand is the industry entity, owned by the banks, that manages the banking payments fabric in NZ.

In a complex and fast moving environment our goal is to get ahead of the curve and make sure our payment system is ready for the changes when they arrive. By including the groups and individuals that drive our industry on this journey we will ultimately make participation easier and reduce costs for all.

The banking industry is making progress on mobile payments. The objectives of the project include:

Achieve a minimum level of security, interoperability, reliability and usability

Ensure the on-going integrity of the domestic payment system

Ensure that all stakeholders and participants continue to maintain trust and confidence in the system

Establish a sustainable rules, standards and principles framework for the Mobile Payments eco-system to enable on-going evolution and innovation.

In addition to these objectives we believe the outcomes to Merchants need to be considered. For example …

There be a way to pay and be paid with no percentage of a transaction fee, as EFTPOS works now.

Fees are levied on the right party. When should the Consumer or Merchant pay?

Consumers should benefit from deciding to pay directly (bank to bank) versus paying with credit.

This is a complex area so we’re not sure we have all this completely right (please let us know in the comments). But at this vital time we think it’s worth shining a light on the importance of mobile in payments and encourage the banks to work together.

We think having the benefits of EFTPOS in a mobile payments world is compelling.

If, with our small number of banks, we can develop a world class mobile payments mechanism. We’re uniquely positioned to get it right and become a test lab or case study for modern banking globally.

12 comments

Bill McGeown

June 26, 2013 at 12.36 pm

An additional note around your experience with paying via your “combined” card, some merchants are now actively refusing contactless transactions for some “debit” cards. These cards are directly tied to a bank account but have a “credit card number” so that purchases can be made online or overseas directly from their bank account. Some merchants are refusing contactless transactions on these cards due to the Merchant Service Fee involved vs the zero fees if they use the eftpos facility on the card. Countdown is probably the most prominent New Zealand merchant doing this but there are others.

This whole process causes problems and confusion for the average consumer who might try tap and go payments and then assume “it doesn’t work”. It’s interesting considering the latest tv advertisement from Visa i believe which insinuates that tap and go is faster than cash, when it could be considerably slower if the merchant doesn’t want to accept contactless debit payments tied to bank accounts.

The sooner we can get a contactless or mobile bank to bank/EFTPOS solution the better, as the current solutions are far from perfect, and can potentially give the technology a bad name in the eyes of the public.

One does wonder whether the banks get a share of the merchant fees from the scheme and so have less incentive to bring EFTPOS up to be able to be used contactless. It’s exactly the same in Australia as it is in NZ.

One other way to attack this would be to reduce merchant fees for credit cards. There is no reason for them to be over 1.5% and ideally under 1%. The likes of Square overseas have shown this is possible.

Diners is dying a slow death because of this (high fees) and Amex is only surviving because of its huge marketing budget and ‘elite’ status.

Impressive article. I think you’re right on. Ive worked at the Reserve Bank who has oversight of NZ payments systems, in Banks who, trust me, are making huge profits from credit card merchant fees for very little risk, and I also own a small business that is unhappy paying these unjustified merchant fees – but have little options to be competitive.

We would love to take advantage of Xeros new add-on partners in this field, but we cant justify taking 3% from our sales.

I spoke to a shop keeper today about the new contactless payments system, and while he’d love to have it, he said it just doesnt make sense financially. For that reason, I dont think it will catch on like EFTPOS has – unless the fee structure changes.

Another new development is “real time” settlement that the RBNZ has instigated – soon settlements will happen 3 or 4 times per day (SBI), rather than once at midnight. Its a small step in right direction. But hardly “real time”.

Having done a reasonable amount of security work in the past, and knowing how straight-forward it is to defeat many IT or sensor-based systems I could never be in favour of contact-less payments – in all probability this will turn out to be very expensive as a result of fraud.

A good synopsis of the current state of play. I think you are spot on with your assessment of the value that will be removed from the local economy if all transactions move to the schemes. From a historical perspective, the main reason that EFTPOS is so prevalent in NZ (try using it in Aus for a sub $20 transaction) is that there was a race to zero fees in the early days between EFTPOS NZ and what became Paymark. EFTPOS fees were charged to the cardholder and then have been absorbed in your current account fee. Merchants liked this as all of a sudden they had a very low cost way of collecting money from customers (just the cost of the terminal) – much cheaper than cash collection.

The schemes have responded with their own debit cards which, while they currently attract no fees for debit use, form in other markets will see them get to a tipping point where they start charging fees to retailers.

The banks have no incentive to change this at this point – the card issuance teams are doing great as a result of the subsidies that Visa and MC pay while the payments teams aren’t really losing revenue, not volume.

The two parties that are driving the conversation about an EFTPOS 2.0 are Paymark (what happens to them if there is no local EFTPOS) and the Retailers Association.

Interestingly the motivations of the banks and telcos (both locally and globally) don’t appear to be lined up the way that you would think. It is the telcos that are fearful of the over the top players (Apple, Google, Samsung) marginalising their role in the mobile ecosystem down to a network provider. That is why telcos are developing infrastructure in regional markets to direct mobile payments onto telco SIMs (as opposed to secure elements that are already in phones, waiting to be activated). Banks on the other hand are happy to maintain a current account relationship with customers and see things like Visa and MC on the phone as just an extension of the current card market.

That still leaves a very interesting opportunity for other players. We have learned a lot in the last year with Snapper Mobile. Very good results in transport, retail and a great take up of Snapper Parking since launch last week combined with the challenges of lack of ubiquity in mobile payments devices (NFC iphone anyone?). We have created a common specification that we have shared with Payments NZ and have a few more things in the pipe where we think we can make payments better for everyone. And not being an incumbent means we can take a very different approach to fees.

@CJ_NZ Square is up there with some of the most expensive fees – $275 per month all you can eat or 2.75% per transaction. You need to be processing more than $120k USD pa before the monthly fee makes sense at which point you would be able to get a better deal from your bank normally.

Security, in my opinion, will be the key determining factor in which mobile payment system(s) are accepted universally by consumers and the e-commerce world.
For ‘contactless payments’ and ‘tap-and-go’ solutions, they still have security vulnerabilities that need to be addressed, if at all possible. Why, other than supposed ‘convenience’ are there spending limits/caps on transactions?
In light of ever increasing attacks to smartphones, would not a biometric scan (what you are rather than what you know (eg. passwords, tokens, etc) be a safer verification method to identify the payer?

Yes, security is pushed to the side in the scramble for convenience. At the same time that the contactless payment system was being pushed by the credit card providers, my card came up for renewal and I requested a card without the contactless payment capability – I was flatly refused and the excuse was it was more secure because ‘the card never leaves your grasp’. The obvious retort is that the radio transmission does!
How odd, that a few years back the same vendors were touting the embedded chip as important to maintain security. In addition, the onus is now on the card holder to be vigilant in reviewing their statement to check that no hacker hasn’t compromised the technology – it is only a radio transmission. Next thing we will see is radio frequency shielded wallets and handbags to protect the cards from fraudsters defeating the ‘secure’ system.

I can’t really agree that Contactless provides a large convenience benefit over swipe card. It takes me about 3 seconds to swipe my card and enter a pin. It takes me about 1 second less without the pin part. With my cheap NFC android phone, it takes the same amount of time to wake up from sleep. God forbid I try something while it’s updating stuff from the play store.

In addition, with my PayPass card, I hate the fact that it’s pin-less. I simply don’t want that level of convenience. Knowing what I know about RFID, I’m not comfortable having my PayPass card stored in my wallet, in fact these days it stays at home.

I think NFC has to be on the phone, and it has to be more sophisticated than it currently is. I’d start by ensuring PIN entry for each transaction is the default behaviour, and then build a system where the individual can set their own PIN-less limit, from $0 up, on a per-retailer basis. Even then, I don’t see myself ever setting this limit higher than $10.

The second factor here is the ‘stolen card’ or ‘stolen phone’ scenario. The former is much worse, because at least with a phone you have the ability to lock down the NFC system based on a pin entry or otherwise. But the point is – with a bank to bank system a la EFTPOS, there’s no inherent layer of protection for the consumer, unlike with credit cards with their sophisticated fraud protection protocols.

Give me the ability to mark my devices and cards as stolen from within internet banking apps, so they take effect immediately. Protect everything with a PIN. Then, maybe, this NFC stuff will have my attention.

Even then, EFTPOS is so good already, it’s hard for me to justify why we should spend so much money on “improving” it with NFC…

Re the comment that swiping a card is fast… Yes it CAN be fast, if all the stars align. But when the reader is not perfect, or the card is old, you have to swipe multiple times, then add paper, or a bag, or tape, I have seen it all. And dont get me started regarding the stripe direction, no consistancy.

Australia are already working towards their mobile EFTPOS standards and the NZ Banks are definitely looking at how to protect the 30-year investment in our very successful EFTPOS system. But seriously – unless retailers want to start paying for this service, EFTPOS Mark II has to be a considered and prudential step. I would rather wait for something that is convenient to both consumers and business; backed by the necessary smarts, speed and security, than be rushed into something with a “suck it and see” approach just for the sake of technology for technology’s sake.
In NZ, we tend to take digital payments for granted – but look around. We do ok for a small country… 🙂